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Tax

Principles & Practices Citation:

II. C. Principle–501(c)(3) Status for the Charitable Nonprofit

After completion of incorporation, creation of the trust with an indenture, or adoption of the articles of organization of an unincorporated association, the board should seek tax treatment consistent with its charitable purposes under Internal Revenue Code 501(c)(3) from the U.S. Internal Revenue Service, and then faithfully and successfully conduct the affairs of the nonprofit entity within that Code sections’ provisions.

Practices

Application should be made to the U.S. International Revenue Service for federal income exempt status on IRS Form 1023 available on the IRS Web site. The nonprofit should also apply for an employer identification number (EIN) with form SS-4 which is also available on the IRS Web site. This EIN number is required even if the charitable nonprofit is not an employer.

Frequently Asked Questions about Tax

Under Iowa law, your exemption from state-level income tax is automatic once federal exemption has been obtained. However, there are Iowa taxes beyond income tax which you need to consider as your organization engages in different kinds of transactions. These include sales, use, and property taxes. The Iowa Principles and Practices for Charitable Nonprofit Excellence states, "The charitable nonprofit entity should make application for other state and local tax exempt status, such as property and sales tax (see Iowa Code 427.1(8), Iowa Code 422.45)." (II,D, 4) Take property tax for example. An additional filing is required in order for nonprofits to be exempt. The circumstances under which the nonprofit can gain exemption from property tax are limited. A nonprofit that owns the property from which it runs its business can apply for exemption from property tax. A nonprofit renting real estate is not entitled to any exemption on behalf of the landlord. Nonprofits which generate revenue from the real estate have more difficulty getting property tax exemption and should consider partial property tax exemption if the revenue generating portion of the real estate (such as a museum’s gift shop) can be distinguished from the rest of the facility. The application for property tax exemption is available online. A valuable resource for Iowa nonprofits is Iowa Tax Issues for Nonprofit Entities on the Iowa Department of Revenue's Web site.

Board member status does not preclude one from claiming a charitable deduction for contributions to the organization on whose board an individual serves. Likewise, volunteers and employees are also entitled to charitable deductions for contributions to the organizations they serve. The same rules dictating what qualifies as a “charitable organization” and what qualifies as a “contribution” apply whether or not an individual serves an organization. The regulations about substantiation also apply so that any gift over $250 must be acknowledged in writing by the organization. To avoid any possible perception of self-dealing, an officer or board member besides the donor should sign gift acknowledgements.

No, the general rule is that nonprofits are not exempt from sales tax. Nonprofits that are exempt from federal income tax under 501(c)(3) are automatically exempt from parallel state income tax but not automatically exempt from other state level taxes such as sales, use, and property taxes. See the document Are Iowa nonprofits exempt from sales tax?

Yes. Private foundations are subject to excise taxes in the Internal Revenue Code (IRC) 4940 to 4946 whereas public charities are not. These taxes are the net investment income taxes under IRC section 4940; the self-dealing acts rules under section IRC 4941; failure to distribute income rules under IRC section 4942; the business enterprise rules under IRC section 4943; jeopardizing investments in IRC section 4944; and taxable expenditures under IRC section 4945. Private foundations file Form 990-PF annually. There are numerous questions related to these excise tax provisions on that form. In certain circumstances if the excise taxes are involved an additional filing of IRS Form 4720 must be made. Section 7.27 of the IRS Tax Exemption Manual has a significant amount of information on these various excise taxes. An index of this information is available in Part 7. Rulings and Agreements.

Yes there are stricter limitations on gifts to private foundations. Gifts to public charities by individuals have an annual limit of fifty percent of the donor's adjusted gross income. Gifts to private foundations however place that limit at thirty percent of the donor's adjusted gross income. The figures are somewhat different for corporate donors who can deduct ten percent of their taxable income. If the contribution is capital gain property rather than cash, the limitation is then thirty percent for public charities and twenty percent for foundations. The Iowa Principles and Practices for Charitable Nonprofit Excellence states that "Charitable nonprofits must be aware of and comply with Internal Revenue Code provisions (see e.g. I.R.C. section 170)" (VIII E 2). This is to make sure inaccurate information about gifts is not passed on to donors. A good source for these rules is IRS Publication 526 Charitable Contributions

Volunteers may be able to claim a deduction for such expenses only if all of the following are true: the expense was unreimbursed; the expense was directly connected to the services provided to the organization; the expenses are only of the type that the volunteers had because of their service to the organization; the expenses are not personal family or living expenses. However volunteers are not able to claim deductions for the value of their time (i.e. the income they did not earn as a result of the time they spent volunteering). Volunteers may be able to deduct pro bono consulting, provided that they have a bill for the time contributed performing work for which, as professionals, they would normally charge a fee.